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Citigroup Says Peak Oil Is Dead

17-02-2012

By James Herron

Citigroup announced to the world Thursday that peak oil is dead. The controversial idea that world crude oil production is almost at its peak and will soon begin an irrevocable long-term decline has been laid to rest in the highly productive shale oil formations of North Dakota, with potentially big consequences for oil prices, the bank said.

However, despite this reading of last rites, the data suggest it would be premature to pronounce this patient dead.

Changes in oil markets in the past decade have given significant traction to the argument that world oil production is close to peaking. Despite the huge incentive of a near-threefold increase in the price of benchmark Brent crude from 2000 to 2010, the world barely managed to eke out a 10% increase in crude oil production, according to BP data.

Many have argued that this proves the physical limit on global crude oil production is near, or may already have been passed.

“The belief that global oil production has peaked, or is on the cusp of doing so, has helped to fuel oil’s more than decade-long rally,” Citigroup said in a note to clients. “This is now all changing because of what is happening in North Dakota,” where new technology has led to a large and unexpected surge in oil production from shale rock.

After decades of decline, “U.S. oil production is now on the rise, entirely because of shale oil production,” said Citigroup. Shale oil could add almost 3.5 million barrels a day to US oil production between 2010 and 2022 and has already slashed 1 million barrels a day from U.S. oil imports. One day it may allow the U.S. and Canada to be self-sufficient in oil, it said.

There are other parts of the world with similar promise, the bank said. Argentina has already discovered significant shale oil deposits. Australia may have shale reserves. The prospects for Europe may not be so good, given that one of the more prospective areas is in the Paris basin of France, where shale gas drilling has already been banned.

“The surge in U.S. production clearly indicates that human ingenuity is rising to the challenge issued by long-time oil bulls,” and peak oilers, said Citigroup.

Despite this optimism, it’s a fair bet that not everyone will be convinced. Indeed, there is good reason to be skeptical that the world’s oil production can be forever buoyed by new technology. This is the fact that, year in year out, oil production from existing areas like the North Sea or Alaska declines steadily, meaning the industry must run just to stand still.

Even the optimists at Citigroup acknowledge that existing oil production should naturally decline by between 4% and 5% a year. Between 2010 and 2011, this would have amounted to a hole that needed to be filled of between 3.3 million and 4 million barrels a day.

Only time will tell whether shale really can help oil production overcome this natural gravity and ascend to fresh heights.